I've heard they take the tragically bad ending from every game and go from there, which I thought was pretty damned cool.
They only did it once, actually, as SH3 isn't related to the other two story-wise... but yeah, SH2's story basically revolves around the fact that you failed to get the good ending in SH1. And you know what's really cool? The two endings in SH1 are
almost identical. The game gives you enough clues to realize something terrible is going to happen, but the final scene is the same no matter which ending you get, except for one small change which may go completely unnoticed. You have to play SH2 in order to realize how badly you've screwed up - and it's revealed right off the bat and all of a sudden.